While globalization is impacting many facets of the financial services industry, transformation across the securities industry is particularly heated. Recent deals inked in the last year alone – such as CME/CBOT, NYSE/EuroNext, NYSE and India's National Stock Exchange, and NYSE/Tokyo Stock Exchange - are just some of the evidence of the reinvention of the global capital market.

Building upon prior research, TowerGroup has identified three major issues which are forcing global exchanges to remake themselves - demutualization, consolidation through M&A activity, and regulatory and market structure changes. TowerGroup believes this exchange activity will have varying impacts on the trading strategies employed by key capital markets players. TowerGroup ranks this impact as follows:

- Buy-Side Firms: Medium impact, which will allow for direct execution on exchanges (DMA) that will create greater exchange competitions, leading to lower prices.

- Hedge Funds: Medium impact, which will boost high-frequency trading, leading to greater competition and lower prices.

- Broker-Dealers: High impact, threatening broker stronghold on OTC business. Also, more competitions for attracting buy-side order flow.

Demutualization is another critical factor, particularly in the U.S. exchange market - as it is causing a massive transformation from staid, member-owned firms to aggressive, highly competitive entities focused on growing revenue. TowerGroup believes that this transformation to for-profit entities will drive exchanges toward product innovation, capital investment and cost consciousness.

Along with demutualization, ongoing consolidation and regulatory changes will continue the fight between exchanges, brokers and crossing networks, which will eventually decouple the listing and execution functions. TowerGroup expects key competitive issues amongst the exchanges will be pricing, product coverage, geographic coverage, and speed of service.

"Given these dramatic changes, exchange CIOs are faced with the daunting challenge of transforming IT departments into responsive, dynamic, and fast moving organizations," said Dushyant Shahrawat, research area director in the Securities & Capital Markets research service at TowerGroup. "One would expect IT spending among exchanges to be booming. However, TowerGroup finds that total IT spending across the global exchange market is growing slowly - estimating that exchanges will spend $2.72 billion (USD) on IT in 2006 and that this spending will grow at a rate of 3% through 2009 - breaking down to 4% in 2007 and then slowing to 2-3% from 2007 to 2009."